Audit Expectation Gap: The Trend to Close the Gap in the

21st Century

Being Research Commissioned by the Institute of

Chartered Accountants of Nigeria
Plot 16, Idowu Taylor Street, Victoria Island
P. O. Box 1580, Marina, Lagos

November, 2011

Audit Expectation Gap: The Trend to Close the Gap in the

21st Century

Being Research Commissioned by the Institute of

Chartered Accountants of Nigeria
Plot 16, Idowu Taylor Street, Victoria Island
P. O. Box 1580, Marina, Lagos

By
Muhammad Tanko (PhD, ACA)
Kaduna State University
0802-915-1213; 0807-726-2667
ztanko2003@yahoo.com

CONTENT
Section One
1.1 Introduction
1.2 Statement of the Problem
1.3 Objectives of the study
1.4 Summary of the chapter
Section Two
2.1 Introduction
2.2 The Audit Expectation Gap
2.2.1 Different Perspectives on the Audit Expectations
Gap
2.2.2 The Structure of the Audit Expectations Gap
2.2.3 Approaches to the Audit Expectations Gap
2.3 Factors contributing to Audit Expectation Gap
2.4 Approaches to Narrowing the Audit Expectation Gap
2.5 Empirical Framework
2.6 Summary of the Chapter
Section Three
3.1 Introduction
3.2 Research Design
3.3

Population of the Study

3.4 Method of Data Analysis

3.5 Justification of the Method Used
3.6 Summary of the Chapter

1.0

Introduction

Auditing has its history to a large extent determined by the history of

accounting,

as

the

latter

metamorphosed

and

culminated

with

the

development of the world economy. For instance, Salehi (2008) observed

that although ancient cultures of Mesopotamia, Egypt, Greece and Italy show
evidences of highly developed economic systems, yet the economic fact
during these periods were limited to the recording of single transactions. The
knowledge of support system for the maximization of profit and the
exposition of bookkeeping, as a support mechanism for the determination of
profit or wealth, were very unpopular. With the emergence of large merchant
houses in Italy and some other places in the world, the attitude of profit
maximization emerged at the end of the middle ages, thereby shifting the
domain of trading from the individual commercial travellers to the stable and
more comfortable house merchants, which now is coordinated centrally at
the luxurious desks of the large merchant houses in most parts of the world.
According to Salehi (2008), entering merely one aspect of the transaction
paved the way for heavy embezzlement of cash, which was found difficult to
trace in the ordinary course of business. Therefore, the system of double
entry bookkeeping was first proposed and described by an Italian as a way of
correcting the anomaly. Monk Luca Pacioli in his book Summa de Arithmetica,
Geometria, Proportioni et Proportionalita, dated 20 November 1494 first
introduced the system of double entry as a way of reducing the incidence of
corrupt practices that was easier with the single entry. The introduction of
the double-entry, coupled with the industrial revolution in Great Britain
around 1780 led to the emergence of large industrial companies with
complex bureaucratic structures, in other words the development of the
capitalist economic system.
Capitalism, as a system of economy designed to allocate resources using
market mechanism has characterized modern industrial economies of today

(Watts and Zimmerman 1983; and Dan et al 2007). It further developed the
economic system to the extent that there were needs for external financing
to support the unprecedented economic growth. Lee et al (2009) observed
that the paradigm shift in the structure of business corporations over the
four centuries necessitated the mobilization of financial resources from
increasingly large numbers of small investors through the financial markets
and credit granting by financial institutions. Therefore, the need to look for
external funds in order to finance further expansion coupled with the divorce
between ownership and management gained importance in such an
economic system. This resulted to the growth in sophisticated securities
markets and credit-granting institutions serving the financial needs of large
national and increasingly international corporations. The flow of investor
funds to the corporations and the whole process of allocation of financial
resources through the securities markets became dependent to a very large
extent on reports made by management.
The organisations management has control over the accounting systems of
the organisation and is not only responsible for the financial reports to
investors, the owners of the organisations, but also has the authority to
determine the precise nature of the representations that go into the reports.
Chukwunedu (2009) opined that, it is the responsibility of the management
of the organisation that is vested with the preparation and presentation of
the financial statement of the organisation to the stakeholders, which may
need such information to guide them in their decision making. To increase
the confidence of investors and creditors in financial statements, they are
provided with an independent and expert opinion on the fairness of the
reports. This expert opinion was initially provided by one or more
stockholders, who were designated by the other stockholders to perform the
task as representatives of the rest of the stockholders.

This mark the beginning of the auditing profession as it quickly emerged to

meet market needs for their services. It became necessary that legislation
was soon required to permit persons other than stockholders to perform the
audits, giving rise to the formation of auditing firms. These developments
resulted in demand for the services of specialists in bookkeeping and in
auditing. Thus the institutionalization of audit as a profession was then
merely a matter of time. According to Rostami (2009), it is the auditor that
authenticates the correctness of financial information that is passed to the
end users, and he does that based on his professional code of ethics and
regulation. Therefore, auditors occupy the central role in bridging the
communication gap between the management of an enterprise, and the endusers

of

the

published

financial

reports.

In

nutshell

we

cannot

underestimate the importance of reliable information prepared by the

organizations management, certified by the external auditor that is given to
the users of the financial statement.
Generally speaking, the word audit is derived from the Latin word, audire,
which means to here (CED: 1988). Therefore at the beginning, the word
audit was meant to hear and auditor literally meant a hearer. The
hearing function by the auditor was then aimed at declaring that the
accounts prepared by the management and the financial statements
published by them were true and correct. The auditors function was
therefore, to give assurance against fraud and intentional mismanagement.
With time, the hearing function of the auditor was transformed into the
function of verification. This will mean that the principal purpose of
independent auditing is to form an opinion on the accuracy, reliability and
fairness of representations in the financial statements of organisations, and
to make this information available to external users. Furthermore, the main
objective of audit is also transformed, thus making the auditor declare that
the accounts prepared by the companies as revealed by their financial
statements were true and fair. Littleton (1933) was of the view that early

auditing was designed to verify the honesty of persons charged with fiscal,
rather than managerial responsibilities. In the nineteenth century, the roles
of auditors have been directly linked to managements stewardship function,
with stewardship being regarded in the narrow sense of honesty and integrity
(Flint 1971). But the verifying function was on sampling basis because of the
burgeoning volume of business activity. The International Auditing Practices
Committee (IAPC: 1980) defines auditing as the independent examination
of financial information of an entity, whether profit oriented or not,
irrespective of its size or legal form, when such an examination is conducted
with a view to expressing an opinion thereon. According to Chow (1982),
controlling the conflict of interests among firm managers, shareholders and
bondholders is a major reason for engaging auditors.
Unfortunately, the spate of corporate failures, financial scandals and audit
failures has led to an increase and significant critism and litigation against
the auditing profession (Maccarrone 1993, Dan et al 2007). Transmile Group
for instance, overstated its revenue by RM 622 million for the years 2004 to
2006; Megan Media Holding reported a whopping net loss of RM1.14 billion
for the fourth quarter ended April 2007 as a result of accounting fraud at its
subsidiary. Furthermore scandals can be seen by the over statement of the
assets of Southern Bank Bhd of Malaysia worth RM160 million in 2005, TRI
was discovered to have issued fictitious invoices totaling nearly RM260
million in 1998 and 1999. To sum up Lee et al (2009) cited the critism on the
work of the accountant by the NST (2007) as Investors have asked the
authorities to take tough action against those who helped cook the books of
Transmile group. They (investors) also want them (authorities) to examine
the role of the external auditors (Messrs Deloitte and Touche) and whether
they (external auditors) have performed their duties well in scrutinizing the
numbers. Lim (1993) asserts that the blame should not be placed on the
auditors shoulders alone as the nature and objectives of auditing are
perceived differently by different parties. Likewise Woolf (1985) believes that
auditors as a breed has not become more negligent. The real problem is

related to the palpable gap between our own perception of auditing and that
of the public whom we serve. Sidek (2008) further commented on the
liability of the external auditors as it would only take a few scandals to crash
the stock market.
The

auditors

role

is

to

facilitate

investment,

therefore

if

auditors

underperform, investors will go away. Hence it is the responsibility of the

regulators to examine the role played by the external auditors and to take
speedy action to bring those faults to task.

Due to the aforementioned

litigations Lee et al (2009) observed that whatever will be the outcome of the
litigations in court against the auditors, auditing professions image has been
dented. This can also be seen in the comment of Godsell (1992) who opined
that the phenomenon of increasing litigation against the auditor and the
auditing profession may be due to common beliefs that the stakeholders of
the company should be able to rely more on its audited accounts as a
guarantee of its solvency, propriety and business viability. Therefore, the
understanding of the nature and objective of what auditing is all about may
have been misconstrued.
It should be noted that, the role of the auditor is generally understood by the
general public to be the detection of fraud and error in the financial
statements. This is because it is the auditor that comes to light in any matter
that affects the investigation of fraud or misappropriation in companies. Not
until 1989 when the LJ Lopes of the appeal court stated in the case of Re
Kingdom cotton mills (1896) that the auditor was a watchdog not a
bloodhound. Clearly, this decision brought to light the primary role of the
auditor to exclude the decision of fraud detection. Therefore, the definition of
what an audit is by the users of financial statements, the general public and
the auditors, is what cumulates to bring about the term audit expectation
gap. The concept can better be understood when we have a close look at
the following issues: The audit professions expectation of an audit; the

auditors perception of an audit; and the general public/users of financial

statements perception of the audit
Marianne (2007) observes that, if users of financial statements and the
general public were educated to think that the auditor's role embraces the
detection and prevention of fraud, especially in relation to material items,
the fraud and error detection role of an audit could be relatively objective.
However, absolute objectivity cannot be guaranteed since materiality and
material significance are subjective concepts which require further
clarification by the Auditing Practices Board. A return to the primary role of
detection and prevention would also be welcomed since there are at present,
not sufficient measures to hold the auditor liable for negative consequences
of his actions. Some sources of academic literature assume that the meaning
of an audit is not objective that is not fixed whilst other sources such as
contents of audit reports assume that the meaning of an audit is fixed. In
relation to the latter assumption, there is the belief that the expectations gap
could be significantly reduced if not possible to eliminate.
Pierce and Kilcommins (1996) using the external auditors as their bench
mark as against the bench mark of the audit profession tried to define the
audit expectation gap. To them when the external auditors understanding of
their role and duties is compared against the expectations of user groups
and the general public then we expects to see audit expectation gap. Liggio
(1974), on the other hand, defined the audit expectation gap as the
difference between the levels of expected performance as interpreted by the
independent accountant and the user of financial statements. On the other
hand, where we try to look at the expectation gap with the audit profession
in mind or as bench mark, there will be less subjectivity in the understanding
and definition of the expectation gap and which will narrow the expectation
gap.

Much has been written about the possibility of an audit expectations gap.
The attempt to address the problem especially as to do with the role and
responsibilities of auditors, have led to the establishment of several
government and professional investigations, which form an important part of
the expectation gap literature. These include the Cohen Commission (1978);
Metcalf Committee (1976); and Treadway Commission (1987); in the United
States, the Cross Committee (1977); and Greenside Committee (1978); in the
United

Kingdom

and

the Adams

Committee (1977)

and MacDonald

Commission (1988) in Canada.

While Cohen Commission in 1978 considered whether a gap might exist
between what the public expected and what auditors could reasonably
expect to accomplish, Poter (1993), in his empirical study of the audit
expectation gap, sees the definition of the gap as failing to mention the
possibility of sub-standard performance by auditors. It is against this
backdrop that it is imperative to study the issue of expectation gap in
Nigeria.

1.2 Statement of the Problem

As stated earlier, some sources of academic literature assume that the
meaning of an audit is objective or fixed. Whilst others, see it as not
objective that is not fixed. In other words, audit is recognized as a social
phenomenon which constantly changes, depending on the interaction
between the audit profession and the public (Flint, 1988; Power, 1997; Sikka
et al., 1998). Many have recognized the changes in the audit function as an
effort by the auditing profession to ensure that the profession remain
relevant to its constantly changing environment. Flint (1988), Power (1994;
2000), Epstein and Geiger (1994) and Petland (2000) share that view as they
are of the opinion that the progression in the practice of auditing was
basically in response to a perceived need of the public who seek information

or reassurance about their conduct or performance of their business that

they have placed on the stewardship of the management. However, Fogarty
et al. (1991), Sikka (1992; 2002), Humphrey et al. (1993), Lee (1995) and,
Sikka et al. (1998) are of the opinion that the progression of the audit
function was a direct result of the political games' of the audit profession to
ensure it maintains the power of self-regulation. In this context, the audit
profession seeks to shift the preferred meanings about the nature, practice
and/or outcomes of auditing', in other words leading to the varying definition
and perception of the function of the auditor thereby resulting to a gap
between the services received versus the expected services provided by the
auditors, which is generally termed the audit expectation gap in the
literature.
There are several attempts to account for why is the audit expectation gap
among researchers in the auditing profession. Humphrey et al. (1993) and
Porter and Gowthorpe (2004), for example, have argued that the gap exists
due to a deficiency in auditors performance and auditing standards. Pierce
and Kilcommins (1996), Boyd et al., (2001) and; McEnroe and Martens
(2001),

argue

that

the

gap

exists

due

to

misinterpretations

and

misunderstanding of the meaning of auditing by the users. These studies

suggest that the users do not understand the audit functions and the role of
auditors. Consequently, they have unrealistic expectations of auditors.
Earlier, research by the Canadian Institute of Chartered Accountants (CICA,
1988) and Porter (1993) established the deficient performance, deficient
standards and unreasonable expectations as the components of the audit
expectations gap. However, a recent empirical study conducted by Porter
and Gowthorpe (2004) has shown that these components have changed over
time although the perceptions of pessimism as to the audit functions have
not been eliminated.

The audit expectations gap centres on several issues, most notable among
them are; the auditors roles and responsibilities as opined by Porter, (1993);
Fazdly and Ahmad, (2004); and Dixon et al., (2006). The nature and meaning
of audit report messages opined by Monroe and Woodliff, (1994); and Gay et
al., (1998). Audit independence as opined by Sweeney, (1997); Lin and Chen,
(2004); and Alleyne et al., (2006). Furthermore, Humphrey (1997) classified
the issues on the audit expectations gap into four main areas: audit
assurance, audit reporting, audit independence and audit regulation.
While most of the researches conducted in the area of the expectation gap
are based on the private sector, the research in the public sector has
received little attention by researchers. Pendlebury and Shreim (1991),
Chowdhury and Innes (1998) and Chowdhury et al. (2005) are some of the
prominent researches conducted in the area of public sector. Just as the
private sector, research has indicated that the audit function in the public
sector also changes over time. Lee et al (2009) opined that the public sector
audit was concerned with regularity, legality and probity of government
expenditures. The focus is to see that the budgetary allocations to the
various government agencies are expended according to the purpose to
which they have been set up and that the accounts prepared by such
agencies were properly presented in conformity with the provisions of the
law. Glynn, (1985); Pollitt et al., (1999); and Lee et al (2009) are of the view
that the traditional audit functions have been expanded to include wider
monitoring functions over government agencies. They contended that the
auditors task now, is to examine whether programmes implemented by
government agencies have been implemented economically, efficiently and
effectively. This is widely known as Performance Audit or Value for Money
(VFM) audit. Guthrie and Parker, (1999) further opined that the objective of
the auditors work is to ensure that the government agencies are accountable
not only for the resources they used but also for the effectiveness with which
they used those resources. Accordingly, the public sector audit is now

concerned with terms such as accountability, output, efficiency, and

value for money.
Although studies have been documented in the area of expectation gap for
both the public and private sectors in the developed economies, there is the
absolute scantiness and inadequacy of such literature documented for the
developing economies. It should be noted that, while in the developed
economies there is a developed system in the public sector auditing, the
composition of public sector administration in the developing economies is
still in its infancy. Furthermore, Dye and Stapenhurst, (1998); Berglof and
Thadden, (1999); Chang, (2001); Sandholtz and Koetzle, (2000), opined that
the developed countries are usually characterised by a high-level of
accountability, a clean and efficient bureaucracy and judiciary and a
transparent administration, these characteristics significantly contrast to
developing countries. Kaufmann, (1997); Gray and Kaufmann, (1998);
Sandholtz and Koetzle, (2000) further identified the problem of the possibility
of fraud, corruption and economic mismanagement in the public sector in
developing countries as compared to the developed economies. Similarly, as
for the private sector, the developed economies have more developed,
integrated and independent private sector as when we compared with what
is obtainable in the developing economies.
Additionally, researchers also claim cultural factors of one country could
have implications on the attitudes and perceptions towards accounting and
auditing systems. Agacer and Doupnik (1991); and Patel et al. (2002), among
others, argued that the adoption of accounting and auditing systems of
developed countries in developing countries might face many cultural
obstacles such as in the interpretation of standards, audit procedures and
codes of conduct. Among the possible cultural factors are the level of
transparency (Gray, 1988), conservatism and collectivitism (Gray, 1988;
Schwartz, 1994) and power distance (Hofstede, 2001; Ding et al., 2005; Ali,

1999). In a high power distance society, for example, researchers such as

Patel et al. (2002), Hofstede, (2001) and Ding et al. (2005) suggest that
individuals would respect and value the views or orders of elders, superiors
and authority. Consequently, they would accept a hierarchical order in which
everybody has a place which needs no further justification (Salter and
Frederick, 1995). Thus, it is possible this factor will significantly influence the
perceptions of the users and auditors on the functions of performance audit
and auditors work.
All these factors can certainly change the outcome of research conducted in
the developed economies as compared to the developing economies like
Nigeria. Apart from the scantiness of the research in the area of audit
expectation gap in the developing countries, the term as it is may be
detrimental to the financial reporting and auditing process. Lee and Ali
(2008) opined that audit expectation gap is detrimental to the financial
reporting and auditing process, as the public may perceive the work
performed by external auditors as unsatisfactory. Therefore, the audit
expectation gap is crucial to the audit profession as they determine the value
of auditing and the reputation of auditors in modern society.
In Nigeria, few studies attempted to document the problem of the
expectation gap, for instance, the study of chukwunedu (2009). The study
presented the opinion of a small number of the members of the institute of
chartered accountants of Nigeria on the problem of expectation gap.
Unfortunately the study used a small size number as the sample size, apart
from the restriction of the sampled respondents to only one part of the
stakeholders on the problem, the study also used a weak tool for the analysis
of the data collected. Okoye and Okaro (2011) studied the accounting
academics on the issue of whether the injection of forensic accounting
techniques, on a cost/benefit basis, in an audit is capable of increasing the
ability of the auditor to discover fraud and thus help in bridging the audit

expectation gap in Nigeria. Again the analysis in the study was weak and
restricted to only accounting academics. Akinbuli (2010) provided an x-ray as
to the literature on the problem of expectation gap. The study centres on
providing theoretical explanation of the term and the implication of the
problem of the expectation gap, such as the high rate of litigation that awaits
the audit profession and an alarming increase to the liability against the
auditor. The study finally recommended that the auditor improve his
performance to reduce the audit expectation gap. Finally, Adeyemi and
Uadiale (2011) investigated the audit expectation gap using Lagos state as
the base for the respondents. Apart from the restriction of the study to the
Lagos state as the base for the sample selection, the respondents used were
very few and do not cover the major stakeholders of the expectation gap.
Therefore, it is against this backdrop that this research work has been
undertaken with the aim of documenting whether or not the audit
expectation gap exists in the Nigerian society with the perception of diverse
views of the various stakeholders in the area of the audit expectation gap.
The next section provides the specific objective of the study.

1.3 Objective of the Research

The main objective of this research is to establish whether or not the
problem of audit expectation gap exist in Nigeria, and that whether those
areas of concern, (areas that brought about the creation of misunderstanding
between the public and the audit profession) could be identified and
measures could be taken to either eliminate them or reduce them to the
bearest minimum. The research will make policy recommendations based on
the outcome of the research. More specifically the paper will address the
following issues:
(i)
(ii)
(iii)

Whether the expectation gap exists in Nigeria

Whether the areas of the gap could be identified
Whether it is possible to eliminate the gaps

(iv)

Whether it could be reduced in cases where it could not be

(v)

eliminated
Make policy recommendations as to ways of improving the
reduction of the expectation gap